Commodities
Why do big companies refuse to produce more oil and gas production?
Major companies are refusing to produce more oil and gas production. The energy giants are still reeling from the recent collapse in oil prices and are unwilling to take risks.
Now that oil prices are much higher than $100/bbl, you can hear the question on every corner: why don’t the world’s energy giants take advantage of such a good opportunity and drill huge numbers of new wells to make billions on high prices?
The World Community is Asking OPEC to Produce More Oil
There are many reasons for this strange behavior, but analysts generally name three. Firstly, oil companies have not yet fully digested the trillion-dollar losses of the last decade. Second, expensive gasoline does not yet mean high profits for oil companies to justify the development of new fields.
And third, the growing popularity of electric vehicles makes most oil companies satisfied with the bird in the hand in the form of already developed wells, which now bring good profits; rather than chasing the crane in the sky, i.e., super profits, the hunt for which carries huge risks. Will Saudi Arabia produce more oil?
There is no definite answer. The first reason – the losses of the past years are mostly psychological in nature, but this does not make them any less strong. Because of the collapse in the oil markets in the middle of the last decade, oil companies lost over $1 trillion. For example, among the four oil giants covering all areas of the oil industry, from exploration of new fields to equipment and well maintenance: Royal Dutch Shell, Occidental Petroleum, Transocean and Halliburton, only one company – Shell – managed to make money rather than incur billions of dollars in losses in 2014-18.
It also answers the question of why Canada doesn’t produce more oil. The events of 2014-20 taught oil workers to be cautious and to always remember that high prices can collapse at any moment, and that a company that forgot about this and invested all its money in exploration and expansion of production is likely to go bankrupt.
Life has taught oil companies that it is safer to be conservative regarding costs, i.e. not to invest everything they have, no matter how much they might want to, in exploration and production. That’s why many oil companies have such low budgets for these items, despite the ideal market situation.
It might seem that you can forget about caution when prices are at, say, $120 per barrel, but the fact is that the oil markets are not ruled by arithmetic, but rather by higher mathematics.
For example, the oil markets are now in a situation described by the English word “backwardation,” when oil prices are currently higher than futures prices. In deciding whether to invest in new wells, an oil company director should analyze not the current oil prices. but the prices of the time when the first barrels of oil will be extracted from the new wells. If, for example, we are talking about the end of 2023, we can expect to be able to sell it for a maximum of $78 a barrel. That’s well below $97.5 a barrel on the spot market. Earlier, producers began to produce more oil as Iran’s supply fell.
If you add conservative thinking to backwardness, it becomes more or less clear why new wells are not growing like mushrooms after the rain and why oilmen and investors are in no hurry to “bury” big money in the ground.
Situation in the oil markets is slowly changing
Despite the above-mentioned reasons, the situation in the oil markets is slowly changing. The number of working rigs has now reached a two-year high, and in the next few months it may reach pre-pandemic levels.
Production is growing very slowly, but still. But it is not growing fast enough if there is a collapse in oil prices. This means that the cash flows that oil companies are generating at the moment should continue indefinitely until demand drops.
Contributing to oil companies’ reluctance to take risks and invest in new production are electric cars. Last year, one in 12 new cars sold was electric (8.6%). Data for the first six months of 2022 suggest that this figure could grow by about 50%.
Naturally, such rapid development of electric cars cannot help but get on the nerves, and confidence of oil companies. Few people want to increase production when they realize that the main consumer of oil, i.e. cars, is increasingly switching to electricity.
By Enes Tunagur
LONDON (Reuters) – Oil prices fell on Tuesday as investors assessed U.S. President Donald Trump’s plans to apply new tariffs later than expected while boosting oil and gas production in the United States.
futures were down $1.42, or 1.77%, to $78.73 per barrel at 1116 GMT. U.S. West Texas Intermediate crude futures were down by $1.97, or 2.53%, at $75.91. There was no settlement in the U.S. market on Monday due to a public holiday.
Pressuring prices on Tuesday was a stronger U.S. dollar, as its strengthening makes oil more expensive for holders of other currencies.
“The current weakness is most probably Trump and dollar-related,” said PVM analyst Tamas Varga.
The dollar rebounded after Trump’s comments on imposing tariffs against Mexico and Canada, Varga added, noting that the dollar’s strength is negatively impacting oil prices.
Trump said he was thinking of imposing 25% tariffs on imports from Canada and Mexico from Feb. 1, rather than on his first day in office as previously promised.
“The initial sense of relief that trade measures weren’t an immediate focus on Trump’s ‘Day 1’ was quickly offset by reports of 25% tariffs on Mexico and Canada as early as February, which saw risk sentiments turn,” said Yeap Jun Rong, market strategist at IG.
Trump did not impose any sweeping new trade measures right after his inauguration on Monday, but told federal agencies to investigate unfair trade practices by other countries.
The U.S. president also said his administration would “probably” stop buying oil from Venezuela. The U.S. is the second-biggest buyer of Venezuelan oil after China.
Trump also promised to refill strategic reserves, a move that could be bullish for oil prices by boosting demand for oil.
Also weighing on prices on Tuesday was the potential end to the shipping disruption in the Red Sea. Yemen’s Houthis on Monday said they will limit their attacks on commercial vessels to Israel-linked ships provided the Gaza ceasefire is fully implemented.
“Reopening of the Suez Canal will create a short-term abundance of supply given the shorter journey times, and that may also weigh on prices in the short term,” said Saxo Bank analyst Ole Hansen.
Investing.com– Oil prices slipped slightly lower Monday, as optimism over tighter supplies, amid stricter US sanctions against Russia, was offset by caution before President-elect Donald Trump’s inauguration.
At 07:15 ET (12:15 GMT), expiring in March dropped 0.2% to $80.61 a barrel, while fell 0.1% to $77.31 a barrel.
Crude prices retreated slightly after recording four weeks of strong gains, as traders awaited news from Washington, with volumes limited by the US holiday.
Trump inauguration in focus for tariffs, energy cues
Markets were now focused squarely on Trump’s inauguration later on Monday, with the President-elect having promised increased trade tariffs on top oil importer China.
Trump also reiterated plans to increase US energy production during a Sunday rally, promising to lift regulations on the domestic energy sector.
Higher US production- which already stood close to record highs of over 13 million barrels per day in 2024- could potentially offset the impact of recent sanctions against Russia by keeping global crude supplies underpinned.
Trump has also vowed to dole out expansionary policies during his term- a trend that could underpin demand in the world’s biggest oil importer. US oil demand was a mixed bag in recent months. While cold weather did spur increased demand for heating fuels, it disrupted travel across large swathes of the country during the travel-heavy year-end holidays.
“There is a fair amount of uncertainty across markets coming into this week given the inauguration of President Trump and the raft of executive orders he reportedly is planning to sign. This combined with it being a US holiday today, means that some market participants may have decided to take some risk off the table,” analysts at ING said, in a note.
Oil markets weigh demand, supply outlook
Traders were speculating over a somewhat mixed outlook for oil supply and demand. While recent US sanctions on Russia could limit global supplies, this could be offset by demand remaining soft, especially if Trump imposes steep trade duties on China.
China is the world’s biggest oil importer, and has seen a steady decline in its appetite for crude amid persistent economic weakness.
“Output data from China on Friday shows that refineries increased the amount of they processed by 1.3% year-on-year in December,” said ING. “However, for full-year 2024, refinery activity still fell by 3.6% YoY, reflecting weaker domestic demand. Output and trade numbers suggest that apparent oil demand in December came in at a little more than 13.9m b/d, down from 14m b/d the previous month, but up 0.6% YoY.”
The People’s Bank of China kept its benchmark loan prime rate unchanged, as widely expected, on Monday.
Beijing is expected to ramp up its stimulus measures in the face of trade headwinds under Trump. Recent data also showed China’s economy improved after Beijing doled out its most aggressive round of stimulus measures in late-2024.
Recent gains in oil have also been curtailed by easing tensions in the Middle East, as Hamas and Israel exchanged hostages and prisoners over the weekend under a recently signed ceasefire, which also saw traders attach a smaller risk premium to oil.
(Ambar Warrick contributed to this article.)
By Arunima Kumar
(Reuters) -Oil prices were steady on Monday as traders awaited U.S. President-elect Donald Trump’s inauguration in the hope of some clarity on his policy agenda, including plans to end the Russia-Ukraine war.
futures dropped 37 cents, or 0.46%, to $80.42 a barrel by 1004 GMT. U.S. West Texas Intermediate (WTI) crude futures were down 24 cents, or 0.31%, at $77.64.
The more active U.S. WTI crude March contract fell 36 cents to $77.03.
The focus is what executive orders Donald Trump will sign over the next 24 hours, said UBS analyst Giovanni Staunovo.
Charalampos Pissouros at broker XM, meanwhile, said that oil prices were trading a little lower on expectations that Trump will relax energy-related sanctions against Russia in exchange for an end to the war in Ukraine
Trump, who will be inaugurated later on Monday, is widely expected to make a flurry of policy announcements in the first hours of his second term, including an end to a moratorium on U.S. liquefied (LNG) export licences as part of a wider strategy to strengthen the economy.
The Brent and WTI benchmarks advanced more than 1% last week for a fourth consecutive weekly gain after the Biden administration sanctioned more than 100 tankers and two Russian oil producers.
That led to a scramble by top buyers China and India for prompt oil cargoes and a rush for ship supply as dealers of Russian and Iranian oil sought unsanctioned tankers for oil shipment.
While the new sanctions could cut supply from Russia by nearly 1 million barrels per day (bpd), recent price gains could be short lived depending on Trump’s actions, ANZ analysts said in a client note.
Trump has promised to help to end the Russia-Ukraine war quickly, which could involve relaxing some curbs to enable an accord, they said.
Easing tension in the Middle East also kept a lid on oil prices. Hamas and Israel exchanged hostages and prisoners on Sunday that marked the first day of a ceasefire after 15 months of war.
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